Wednesday, November 28, 2007

Social Security

I was discussing Social Security today and came across this piece of propaganda from Rock the Vote. I'm not stating that it's any less propaganda than my blog, but it's certainly not a flat statement of the facts.

What I wanted to comment on primarily was his assertion at the beginning that "Following is a table that illustrates, in 2005 dollars, the annual benefit that Social Security can pay with no changes at all." But his table is missing some data that would be rather critical in assessing whether it in fact "illustrates" that. The most obvious is what is he assuming the inflation rate to be? It took me a while to find the assumptions on the Social Security Administration publication from which he appears to draw his data and it looks like we're assuming a 2.8% inflation rate, a 1.1% increase in average real wages, a 1.95 fertility rate, a .67% average annual death-rate decline, and an immigration rate of 900,000 persons per year (illegal and legal).

Those might actually be reasonable estimates. I suspect 2.8% is low for inflation and 1.1% is very high for increase in real wages (1985-1995 for instance averaged something like .75%).

A bigger problem is that he's assuming that the "trust fund" actually works as advertised. So while (making all the above assumptions) Social Security can continue being 12.5% of payroll and payout what he posts, we currently put a sizable part of that into the general budget by "buying" treasury notes. I've read numerous people who say that the government would never default on those notes because then the entire economy would collapse. I don't buy that.

Social Security does not have a guaranteed benefit and those notes belong to the Social Security Administration, not to individual taxpayers. It's basically like saying if my wife made all the money in the family and had all the assets you could give me money that I made a promise to pay back later and I then loaned that money to her and she spent it. If the two of use decided later that I would just forgive her the loan then you would be up a creek. You could sue me, but I don't have assets. You can't sue her because she doesn't owe you anything. That's how the "Trust Fund" works. You pay money to the SSA, they loan the money to the rest of the US government. If they later decide they're just going to shut their doors and not worry about those T-bills it doesn't hurt the rest of the market at all, the government hasn't really defaulted on anybody except itself. It's actually a little bit worse than my analogy because in my analogy you made me a loan, with Social Security you are paying taxes that are "not earmarked, and ... Congress is at liberty to spend them at will." (Helvering v. Davis (301 US 619, 645)) so the government owes itself money for those bonds but neither Congress nor the Social Security Administration owes any individual anything related to Social Security. If the benefit went away tomorrow the government would still have upheld their legal obligation (which is none).

Anyway based on the SSA estimates in 2014 things will reverse and the SSA will start having to collect on those T-bills to meet shortfalls in the program (but they won't have a shortfall excluding the "trust fund interest" until 2026 or run out of money until 2040). The problem with this is that the shortfall escalates fast:

yearshortfall (in billions of dollars)
2015 7
2020 201
2025 506
2030 908
2035 1382
2040 1908

Keep in mind that the current entire budget is 2.3 trillion. So we're assuming that by 2040 we're going to double income tax revenues so we can support the existing programs plus pay a nearly equal amount back to the "trust fund". By the end of his chart we're paying out 10 times the current budget to keep up with shortfalls.

I don't know at what point the taxpayers say "No more" to this, but I'm pretty sure it's before that. Personally I would rather be in just about any situation than that one. If you could offer me a program where I continue throwing 12.5% away for as long as I work and the program goes away the day I retire, I'd still take it just so I didn't leave this mess to my kids.

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